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Irregular Expenses: The Silent Killer

Jun 01, 2017

In my ten years as a Financial Advisor I have come to understand that one of the biggest threats to our financial security is what I call irregular expenses. They lurk in the shadows between the neat and tidy monthly expenses on our spreadsheets (or in our head) accruing silently until the leap out at us ravaging out savings, derailing our long-term plans, and sometimes forcing us into debt.

Things like a new foundation or roof for your house, a new A/C for your car, or even Christmas or Holiday gifts are not exactly unexpected. We all know we will have to pay for them at some point, but they are not true emergencies for your emergency reserves (like a job loss or catastrophic medical expense would be). In my experience they don’t appear on most people’s budget, and when they do they are usually grossly underestimated. This article is about how to identify them and how to prepare yourself to deal with them.

So what exactly is an irregular expense? It is an expense that occurs less frequently than monthly. It can be several times a year as is the case of changing your air filters to a handful of times over your life like a new A/C for your house.

We will start with the big ones and work out way down. This list is by no means meant to be comprehensive, but is a good place to start.

Home Maintenance – I usually recommend socking away between 1.0%-1.5% of your home’s value per year for items like repairs, a/c units, appliances, etc. Many years you will barely touch it and some years you may wipe it out completely. For a $330k priced home in Austin, TX this comes to $4,125/year at 1.25%.

Car Maintenance - The same thing as above, but for your car. For this example I used the 5 year cost of ownership information from www.edmonds.com for a 2011 Ford Focus. The total between maintenance and repairs came to $1,381/year over 5 years.

Holiday Gifts – This is going to vary wildly depending on your family culture, but I assumed $1200/year based on my experience.

Spouse’s Birthday Party & Gifts: A get together at the house or a restaurant and a gift. Let’s call it $300/year for this example.

Anniversary/Vacation: An anniversary gift, dinner, and some kind of family trip or vacation once per year. Let’s call it $2,000.

Registration and Inspection: $120/year

Obligatory Gifts and Dining: A bottle of wine for the dinner party, a meal out for a friends birthday, treating your family that is visiting in town, or other obligatory social events. $40 every other month is $240/year.

Tolls: $100/year for toll roads

Contact Lenses: $80/year

OK, let’s add all of this stuff up and see where we are at! $9,546/year in irregular expenses which comes to just under $800/month!!! It’s no wonder that so many American’s just can’t figure out where all their money is going. While we are busy focusing on the normal regular monthly expenses these silent killers are robbing us blind and derailing out plans! Many Americans find themselves draining their emergency fund or going into debt with major car or home maintenance bills. With kids there are a host of other irregular expenses like school trips or supplies, summer camps, sports club dues, fund raisers, and even back to school clothing or sports equipment and music instruments.

Most of these things are not even true emergencies, they are all things that can/should be planned for and I strongly encourage you consider putting these into your monthly budget and transfer these funds to a savings account that is separate from your emergency fund. Taking your irregular expenses out of the shadows and into the light of day on your regular monthly budget does three things.

1.) It keeps you honest about your budget and capacity to take on new expenses. Because you are already accounting for these in your budget you less likely to overcommit to other regular monthly expenses.

2.) It can help keep you out of debt, or get out of it faster. Even if you start doing this today and three months later you need a $6,000 A/C for your house, you will pay it off faster because you already have a big monthly chunk of money set aside for home maintenance rather than trying to figure out where that money will come from. Once you are done paying it off you can start saving again in that separate savings account.

3.) It also gives you a more realistic grasp of the kind of income you will need in retirement, to become financially independent, or that you will need in a catastrophic event like a death or disability for your family.

In summary, irregular expenses are expenses that do not occur every month. They can be small things like contact lenses or large things like new tires for your car or truck. By identifying them, creating a monthly budget for them, and transferring that money into a separate savings account you avoid overcommitting to regular expenses and reduce stress for you and your family. It can be complicated and budgeting is just one of the many ways I can help! Please feel free to e-mail me for a complimentary phone call to discuss your situation: Brendan.pheasant@northstarfinancial.com

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